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Trump’s trade war begins, and China hits back — sort of

The initial round of tariffs is expected to have little effect, but the danger is that, ‘this will accelerate like a snowball going down a hill’, as one analyst puts it

06 July 2018 - 07:13
Agency Staff

Picture: 123RF/lightwise

Beijing — US President Donald Trump fired the biggest shot yet in the global trade war by imposing tariffs on $34bn of Chinese imports.

China’s Foreign Ministry said Beijing has already begun implementing tariffs on some US goods in retaliation.

China’s Commerce Ministry, in a statement shortly after the US deadline passed at 4.01am GMT on Friday, said that it was forced to hit back, meaning $34bn worth of imported US goods, including autos and agricultural products also faced 25% tariffs.

However, the Chinese government stopped short of actually saying it had implemented tariffs, stirring market confusion.

Another $16bn of goods could follow in two weeks, Trump earlier told reporters, before suggesting the final total could eventually reach $550bn, a figure that exceeds all of US goods imports from China in 2017.

US customs officials will begin collecting an additional 25% tariff on imports from China of goods ranging from farming plows to semiconductors and airplane parts.

China’s officials have previously said they would respond by imposing higher levies on goods ranging from American soybeans to pork, which may in turn prompt Trump to raise trade barriers even higher.

"The United States has violated World Trade Organisation rules and ignited the largest trade war in economic history," China’s Commerce Ministry said in a statement.

The statement did not provide details on exactly how China would respond.

It is the first time the US has imposed tariffs directly aimed at Chinese goods, following months in which Trump has accused Beijing of stealing American intellectual property and unfairly swelling America’s trade deficit.

The riskiest economic gamble of Trump’s presidency could spread as it enters a new and dangerous phase by imposing direct costs on companies and consumers globally.

"Once these tariffs start going into effect, it’s pretty clear the conflict is real," said Robert Holleyman, former deputy US trade representative under President Barack Obama and now a partner at law firm Crowell and Moring.

"If we don’t find an exit ramp, this will accelerate like a snowball going down a hill."

Recent US tariffs on steel and aluminium antagonised fellow developed nations and drew return fire from countries including the European Union and Canada.

Chinese state media has run numerous commentary pieces on the dispute over the past few days criticising the American position.

As the world’s most developed nation and the rule-maker of the current global governing system, there is "astounding absurdity" in the US complaining that it’s been bullied in trade, the People’s Daily, the flagship newspaper of the Communist Party of China, said in a Chinese-language commentary on Friday.

Iconic American companies such as Harley-Davidson are among those set to suffer. The motorcycle maker said this month it may move production out of the US to avoid EU tariffs on its bikes.

American businesses from Apple and Walmart to General Motors all operate in China and are keen to expand. That hands Chinese President Xi Jinping room to impose penalties such as customs delays, tax audits and increased regulatory scrutiny if Trump delivers on his threat of bigger duties on Chinese trade.

Stocks down

Chinese stocks have taken a beating in recent weeks, entering a bear market, as concern about the trade war has mingled with worries about China’s ability to control its debt and maintain growth.

US stocks are up slightly more than 2% this year as investors have weighed the threat of trade frictions against the strong performance of the US economy.

Trump is doubling down on his promise to put "America First" in foreign and economic policies. He blames China for a bilateral trade deficit of $336bn and for costing US manufacturing jobs.

Politically, the get-tough-on-China campaign is aimed at helping score points with the voters who propelled Trump to the White House even though some members of his Republican party — particularly those in farming states that could be hit by retaliation — urged a retreat.

The tariffs could jeopardise an economic upswing that has extended to nine years on his watch and pushed the jobless rate to the lowest in nearly half a century. US and Chinese companies will now find it costlier to trade with each other, meaning less demand and higher prices.

The International Monetary Fund warns an extended spat could undermine the strongest global expansion since 2011.

The extent of the economic damage will depend on how far both sides go. If the US and China cool off after a first round of tariffs, the impact on their economies will be modest, according to Bloomberg Economics.

Under a full-blown trade war in which the US slaps 10% tariffs on all other countries and they respond, the economists reckon US growth would slow by 0.8 percentage points by 2020.

The impact of the first round of tariffs on $34bn in Chinese goods will be "quite small", said Ethan Harris, head of global economic research at Bank of America Merrill Lynch. But he does not "see the war ending until there are casualties".

"This plays out over the next few months, until both sides start to feel a little pain and realize this isn’t a bloodless march to victory," said Harris.

JPMorgan Chase economists warn the biggest risk may come from the indirect impact of tightening credit conditions and business confidence, reducing scope for investment and hiring while undermining financial markets.

Vehicles could be the next battleground. The Trump administration is reviewing whether to introduce duties on imported cars and trucks in a bid it says to protect US national security. The threat deepened tensions with the EU, which warns that car tariffs would inflict pain across its 28 member states.

Trump argues that his approach will force other countries to trade more fairly, reducing America’s $552bn trade deficit and prompting employers to return to America.

But recent US tax cuts and spending increases will probably buoy the dollar and the nation’s current-account deficit anyway, the IMF said this week.

America’s hawkish trade agenda may therefore not deliver the results the president is seeking.

That could set the stage for a prolonged conflict with Beijing, which has shown little interest in making fundamental changes to its economic model.

Xi has balked at US demands to stop subsidising Chinese firms under his plan to make the nation a leader in key technologies by 2025. Negotiations between the two countries petered out with the Chinese accusing the US of blackmail.

The US imports much more from China than the other way around, giving the US an advantage in a tariff dispute. That means Beijing could focus on introducing bigger regulatory or tax burdens on American companies who operate in China or want to tap its growing market.

It could even take the drastic steps of devaluing the yuan or reducing its $1.2-trillion holdings of US Treasuries, measures that would hurt it as well as the US.

In the past, the US used its economic clout to win trade skirmishes with developing countries, said James Boughton, a senior fellow at the Centre for International Governance Innovation in Waterloo, Ontario. China, whose economy has grown tenfold since it joined the WTO in 2001, poses a much more formidable adversary.

"The dynamic is different from anything we’ve seen," said Boughton. "China has an ability to ride out this kind of pressure, to weather the storm, that a lot of countries didn’t have in the past."